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02/01/2009

Buy American Once Again-Becker

Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions. The avowed goal is to help domestic workers and businesses that are going through difficult times. Hostility to imports when unemployment is high and rising is surely understandable. Nevertheless, it is unwise to engage in seriously restrictive international trade policies even during a serious recession.
Unfortunately, in the recent stimulus bill passed by the Democratic members of the House of Representatives, the recession is used as an excuse to promote "buy American" policies. The bill would, among other similar restrictions, ban the use of non-American steel in the many construction projects that are part of the stimulus package. This provision was included even though it appears to violate US obligations under the rules of the World Trade Organization, and under the Nafta agreement with Canada and Mexico. This buy American provision in the stimulus bill has already led to retaliatory threats by several European and Asian countries since many other countries are also eager to place greater restrictions on imports.
The economic case for higher tariffs and other trade restrictions during serious recessions is that the economic system does not function well during depressed times. This malfunctioning of the economy creates higher unemployment of both labor and capital. The protectionist argument is that under such abnormal conditions, various means of putting these resources to work, such as tariffs and buy American laws, may be desirable, even though during normal times these would clearly be inefficient and hurt consumers and the economy.
The merit in this argument is overwhelmed by several more powerful arguments against increased trade restrictions, even during serious recessions and depressions. One obvious argument is that retaliation against American exports would surely follow if buy American restrictions remain in the version of the stimulus bill that will become law. The most famous example of such a tariff war occurred during the Great Depression. In 1930, during the early stages of that depression, Congress passed the Smoot-Hawley Tariff Act- named after the two Republican congressmen who promoted the bill. It raised the US tariff on over 20,000 imported goods to unusually high levels. Over 1000 economists of different political views signed a petition that urged President Herbert Hoover to veto the bill. He did not, even though he had favored lower rather than higher tariff rates. In addition to Smoot-Hawley, Congress and President Roosevelt in 1933 passed the first buy American law that required the federal government to prefer US products in its purchases.
After Smoot-Hawley passed, many countries retaliated with increased tariffs on American goods. American-European trade crashed rather soon after these tariff increases, although the growing world depression may have been more important in this crash than the higher tariffs. The Smoot-Hawley tariff played an uncertain role in worsening the world-wide depression of the 1930s, but it surely does not appear to have helped the US moderate the depression that began a year earlier in 1929. By 1933, unemployment had climbed to 25% from only about 3% in 1929, and output had fallen by over 30%.
Retaliation from other countries is not the only negative effect of raising trade restrictions during a recession. The primary determinant of which trade restrictions get imposed on foreign imports, such as the buy American steel clause of the House stimulus bill, is the level of political power different industries have in Congress. The dominance of politics over economic benefits is a general weakness of so-called stimulus packages. The House stimulus bill not only restricts imports of foreign steel, but its spending programs are only distantly related to any positive effects on unemployment. For example, broadband access and alternative sources of energy, such as windmills and solar panels, are both generously subsidized by the House bill. Spending on these and the many other programs in the bill may (or may not) be worthwhile, but such spending will have little effect on unemployment because it will mainly utilize high skilled workers and capital that would otherwise be employed at other activities.
Recessions generally concentrate unemployment among lower skilled workers, along with workers in industries that are particularly hard hit, such as residential housing and banking in this recession. Trade restrictions can do only modest amounts to help either low skilled unemployed workers, or the unemployed in industries like banking and residential construction. However, the retaliation from other countries induced by more restrictive policies would reduce the demand for exports of American goods, such as products of the high-tech industry and agricultural goods, and reduce profits and employment in these sectors.
One major reason why trade restrictions and other government "stimulus" programs may be politically attractive during a recession is that identifiable groups benefit, such as the steel industry, or the recipients of the government stimulus spending. By contrast, the harm to workers in export industries who suffer because of the indirect effects of trade restrictions on exports, or the harm to workers in industries that are crowded out by government spending, is remote and not so apparent.

Comments

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Stan From Sugar land,

Before any of your solutions could be implemented, there would have to be a 180 in the political tendencies of the population and their elected "leaders". The surest way to corral a wild pig is to slowly build a fence around him/her as you repeatedly put food down such that he/she doesn't have to forage in the wild. The current "rescue" is a pretty good example. The fact is that The American standard of living was artificially raised after WWII for the purposes of career politicians and now when the bill comes due and the living standard will most certainly come down, the politicians are too gutless to confront the reality and the population is completely fenced. That, in my humble uneducated opinion, is why none of your suggestions can be or will be adopted. It has nothing to do with what will work or should work or what economic theory is applied. It has to do with what "spin" will keep the political class comfortably at the trough. While it is perfectly feasable to run a profiable business for the benefit of the company and all of its employees and to serve the needs of the community, it is not likely if the management's goals are either to be bought out or to leverage the buyout of others. Pretty soon there is all debt and no cash. One or two hiccups and down it comes. This is particularly true if the company can have its product made for $2/day instead of $30/hour.

Are you talking about trees and lightpoles in the US or in China and would there be a trial in either case or should I assume that that concept will be gone too?

"As a Prince it's better to be feared than loved."
-Machiavelli

I believe he was commenting on the corruption, brutality and debauchery of the European nobility and clergy of the time most of whom had sprung directly from the barbarian tribes much like our current "nobility".

"Retaliation from other countries is not the only negative effect of raising trade restrictions during a recession. The primary determinant of which trade restrictions get imposed on foreign imports, such as the buy American steel clause of the House stimulus bill, is the level of political power different industries have in Congress. The dominance of politics over economic benefits is a general weakness of so-called stimulus packages."

I'm sorry for the lengthy quote. But it is worth repeating.
My point is that this applies in all countries. Suggestions have been made that something could be done in the WTO to get countries to help each other to resolve these domestic problems. Unfortunately, few people seem to be taking any notice.

I read the comments defending trade barriers and "civilized" standards which all should live by with some humor.

If a magic wand could make the rest of the world adopt our values as their own, I wonder how many high minded consumers would appreciate the economic consequences of getting their wish; $10/head lettuce, $8/gal gas, $100 dockers, $2X housing construction cost?

Too few think beyond their high-minded positions to the consequences; trees and telephone poles for sure.

Tom, thanks for the response, however it seems you're prone to hyperbole.

I'd suggest a nuanced response to China's

A. fiddling with exchange rates in a beggar-thy-nation manner to benefit themselves to the disadvantage of not only the US, but Mexico and others who compete more fairly in the low wage venue, and

B. as a tax on their refusal to deal with environmental externalities and miserable work rules.

Perhaps something less than 20% would be a helpful reminder that playing fair has its rewards.

Also, lettuce comes largely from our own farmers and those of North America. $8 gas? Even sustained prices of $3 would lower our consumption/wastage such that we'd soon be independent of M/E oil and the oil producers of the Americas are getting pummeled by China's game too, hardly a reason for them to "retaliate".

Dockers? They're $50 now though khaki's of similar quality are available for half that amount from MANY nations. Housing costs? Hey that's ONE industry that is largely US labor and materials and it's great cause for concern that 'starts' have dropped from 2.5 million to something like half a million.

"High minded?" How about "tough Yankee trader who drives a hard but fair bargain" instead of "sucker presiding over the demise of the American economy and THE market for a major fraction of what is produced in the world?"

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Jim: The rise in living standard after WWII was for the most part real and based on the tremendous increase in productivity that was forced upon us by war time labor shortages and new tech.

Next would be the advent of readily available credit for homes and new cars. The one that perhaps qualifies as "artificial" or at least temporary was that of our MFG base being the only one standing, and that of pegging other currencies to the dollar. (I'm sure our moneychangers dealt themselves a few extra aces while being the world's banker)

It's the fact of tough competitors everywhere and even alternative strong currencies that has me thinking that we can't afford to be big, slow, and clumsy if we want to maintain a std of living that's above that of our emerging competitors, and I don't think it's an easy assignment.

I am fascinated by the opposition by some to the "Buy American" provision in the stimulus bill currently being debated.

I‚Äôm not particularly sharp in either micro or macro economic theory. However, whatever the route we chose to reach this point, where it has become problematic for us to suggest that we buy American, should be revisited so that we do not venture down that path again. It may make ‚Äúeconomic sense,‚Äù at this point in time, to the intellectuals; but it defies the ‚Äúcommon sense‚Äù of the common citizen. I guess that this is just one more thing that the ‚Äúcommon man or woman‚Äù does not understand, and some of our politicians and you politically sophisticated folks do.

Imagine a parent being told, "Instead of choosing to focus on feeding your kids and buying lemonade from their stand, you should advance the interests of the kids of your relatives living in a foreign country, because to do otherwise might come back to haunt you, and it's actually in YOUR long term interests." I know that macro economic principles applicable to the global economy are more complicated than dealing with one's family, but try explaining that to the common man or woman whose taxes are paying for the corporate bailouts.

Unless I am VERY wrong, a generic "buy American" might lead to more jobs but at a labor price closer to "buy elsewhere" and might otherwise lead to serious inflation. Either way, the standard of living in the US is coming down whether or not the are tariffs and excise taxes imposed by us and/or our "partners".

BTW Reggie, it should be clear that if the "intellectuals" had the answers, we wouldn't be in this mess in the first place. The really useful principles are: Don't spend more than you have, save some for a rainy day, don't depend on others to support you, don't trust the government or politicians and have as many skills for independence as you can muster. I am sure that there are more probably equally mundane.

Think lumber from North of our border and farm products from south of the border and as far away as asia. If you are paying more than $29 for Dockers you are one Yankee trader who is getting screwed...

William Manchester in his "A World lit only by fire" descibes a dark ages time when the "common man" had to sell his clothes for food and went about his daily life naked year around. So the question might be what you can SELL your Dockers for and should you consider moving to a warm climate.

Tom: Ha! Well I get the good ones! And one hopes most here can differentiate between having the jam to revisit some of our trade policies from Smoot-Hawley. Usually we don't want to relive history exactly though the end of this "gilded age" bears many similarities with that of 80 years ago.

Jim: Ha! Was it 20 years ago that every one was going to be a survivalist with CA folk stashing arms and canned food in their desert "hideaways?"

I came to the conclusion that Kodiak Island or the Aleutians where the ocean and streams are rich with fish and sea mammals in a climate moderate enough that the waters don't freeze and Aleuts lived a fairly good subsistence lifestyle would be one of the best spots..... and distant enough from the maddening crowds. Kodiak perhaps the better of the two for having trees with which to build bear resistant housing and it's over run with deer.

The way that they will do protectionism this time is interesting. They will not be blatant about it. They will use the regulatory soup to accomplish protectionism. For example, they will create a crisis in something and then write regs to stop it.

Here is a classic example. Pigs have been grown in Canada cheaply, exported to the US to be fattened and butchered, then exported to other countries. The US pig farmers have been under enormous profit pressure due to rising energy and feed costs, and slack world demand. So the US passed Country of Origin Lableling, or COOL.

COOL has caused consternation among Canada and Mexico. Smithfield will no longer import pigs from Canada. Mexico is altering the way it wants butchered pork packaged, adding a lot to operational costs of meat packers. This is effectively a tariff on trade without actually putting a government tariff on trade. Of course, while margins for everyone will get crunched, it will hurt consumers the most.

I applaud those of you who are concerned for the plight of the American unskilled laborer.

Free international trade does increase wealth for all nations. Your concern is that these wealth gains go exclusively to other nations and to the capitalists of this country.

The solution to this is not to kill the golden goose. We should tax the wealthy and pay unemployment benefits. This way we get both the increase in wealth from free international trade and the unskilled are better off.

I am going to make sure that I buy as litle as possible and make just enough money to live an acceptable lifestyle and stay below the "rich" level to get a tax rebate. And of course I will retire if necessary. I will buy the cheapest product regardless of national origin. I will become completely indolent if I can get federal or state funds to pay for the necessities of life, health care, legal aid and whatever other goodies my sociaist masters wish to give me for my vote. Why should I care how stupid and incompetent they are as long as I get mine. And thank you to all of you out there who are going to pay for my way of life. I know that you are loyal and patriotic Americans who want to provide for me and feel really good about it.

Justecon: Good point...... and one that's relevant to job loss from rapid increases in our own productivity. While the "job banks" and early retirement buyouts of the auto companies and others, seem not well understood, they may well be the model for the future.

We've all sorts of structural inefficiencies that are propped up by tradition and legislation but it would be difficult to unwind them, politically, due to the "job losses". So, keep the same built-in feather-bedding? or buy out those who'd feel the immediate harm?

We're entering an era very different from even the recent past and will need to keep an open mind as compared to clinging to tradition.

The problem facing the auto companies and their unions isn't one about free trade. It's about bad management and bad bargaining.

There is nothing inherently wrong with the American worker. In fact, the reason that the American worker is so expensive is because he or she is so much better trained than workers from developing countries. Our workers know math, English, history, etc, and have access to the internet and other infrastructure in the US.

The problem is the management of US auto companies have time and again chosen the wrong cars to build and the wrong technologies to develop. The proof is in the pudding. Japanese cars are more expensive, but still they sell better. I for one cannot wait until all the US auto companies go bankrupt and their managers fired.

Fear not for the US worker. Toyota and others already build a lot of their cars here in the US and will expand to pick up the slack. The only thing that will change is that we'll finally get cars we want to buy!

The UAW has also shot itself in the foot (or the head). Collective bargaining is fundamental to the competitive market, but the UAW made two critical errors that will lead to its dissolution.
1. All eggs in 3 baskets. By agreeing to pensions and health benefits paid for by the auto companies, the UAW tied its fortunes to the success of its employers. Recent negotations have tried to fix some of this, but it's getting late. When retirees lose their pensions, they only have their own leadership to blame.
2. All employees paid on same scale regardless of skill level or performance. The UAW maintained its bargaining model even though car manufacture has dramatically changed since it began. With robots doing a lot of the work, car manufacture is now a highly skilled (and sometimes dangerous) profession. With highly skilled workers on the same pay scale as receptionists, and with competant workers on the same pay scale as the incompetant, they've totally destroyed the incentive to think and contribute to the process.

The same will apply for US airlines. Goodbye Delta, and hello Southwest.

The government may not give us trade policies that we agree with, but consumers are not stupid. It would appear that many corporations that off shored manufacturing assumed that we are. Many of us are demanding MADE IN USA labels on goods or we do not buy. We are not fooled by clever marketing phrases like Distributed by, Manufactured for, or Marketed by. We want the COUNTRY OF ORIGIN label on every purchase, including meats, prepared foods, household items, and personal items. If we do not see MADE IN USA or PRODUCT OF USA, a surprising number of us will leave the goods on the shelf. Retailers do not purchase inventory when they cannot pay for the last shipments that did not sell so well. If you have not noticed, some stores have a lot of empty shelves. Consumers look at labels and walk away. We make do, we find alternatives, and perhaps we are the ones who will eventually fix this pitiful excuse for an economy.